Municipal Bonds Shine Amid Rate Cuts and Investor Demand
MFS Muni Insights
Following a challenging first half of the year, municipal market performance has rallied on lower rate volatility and the resumption of rate cuts from the Federal Reserve.
Performance has bounded back |
Yields are historically high |
Flows have rebounded |
Strong fundamentals |
Performance
Municipal performance has clawed its way back from its historic sell-off in the beginning of April, returning 5.57% (6.86% on a tax-equivalent basis1 ) since April 14 — underscoring the resiliency of the asset class. We believe this positive momentum is likely to continue for the remainder of the year, driven by a continued easing in rate volatility and a more supportive technical environment.
Valuations
Municipal yields remain near historic highs,with a yield-to-worst of 3.66%, which is well above the 5-, 10- and 20-year averages1 . Furthermore, both investment grade and high yield municipal yields offer a compelling tax-equivalent yield, particularly when compared to taxable corporate bonds. We continue to believe the long end of the municipal yield curve offers the most attractive value for investors willing to extend duration, given its historic level steepness. The yield differential between the 10- and 30-year municipals is at a decade high of 138 basis points.
Technicals
Appetite for municipals has remained solid with inflows into the asset class in 19 of the past 22 weeks, helping grow net flows to $29.2 billion.2 Year-to-date inflows have been broad based across the maturity spectrum, but there has been a resurgence in demand for extending duration as the Fed resumes its rate cutting cycle.
Fundamentals
Remain in a position of strength, providing a cushion to credit quality in the event of a recession (not our base case). However, there will be select issuers in some sectors (e.g., higher education, hospitals) that feel more fundamental pressure than others due to recent policy changes or demographic shifts (see below Sector Spotlight). As such, we may start to see the upgrade/downgrade ratio narrow over time, but we believe default rates will remain low and therefore will not be a concern for the asset class.
There will be winners and losers in the higher education sector as a result of the demographic headwinds and recent political pressures from the Trump administration (i.e., funding cuts); this presents an opportunity for active managers such as MFS. Over the coming years, we expect there to be a reduction in the number of individuals pursuing a higher education, resulting in more institutions closing. The universities and colleges most at risk are smaller, lesser-known schools that rely heavily on tuition revenue and lack attractive niche programs. Conversely, we believe that the more durable long-term investments are those institutions with a strong brand identity, growing enrollment, in-demand majors (e.g., nursing, IT, etc.), ample endowment with good liquidity, and a manageable debt burden. |
| MFS National Municipal Bond Funds | ||
| FUNDS | A SHARES | I SHARES |
| MFS® Municipal Limited Maturity Fund | MTLFX | MTLIX |
| MFS® Municipal Intermediate Fund | MIUAX | MIUIX |
| MFS® Municipal Income Fund | MFIAX | MIMIX |
| MFS® Municipal High Income Fund | MMHYX | MMIIX |
| Class I shares are available without a sales charge to eligible investors. |
1 Based on the Bloomberg Municipal Bond Index; tax equivalent return uses the 37% federal income tax rate.
2 As of 9/25/05
Bloomberg Index Services Limited. BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
The views expressed are those of the author and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. No forecasts can be guaranteed. Past performance is no guarantee of future results.
Important risk considerations: The fund may not achieve its objective and/or you could lose money on your investment in the fund.
Before investing, consider the fund’s investment objectives, risks, charges, and expenses. For a prospectus or summary prospectus, containing this and other information, contact MFS or view online. Read it carefully.